Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,nine million dollars in excess reserves,and faces a required reserve ratio of ten percent. Given this information,we can say First National Bank has ________ million dollars on deposit with the Federal Reserve.

Question

Quizplus · Accepted Answer

The required reserve ratio is 10%, meaning that for every dollar deposited, the bank must hold 10 cents as reserves. Therefore, the total deposits on which the bank is required to hold reserves is 20 million dollars (the total vault cash and excess reserves divided by 0.1). Since the bank has already set aside 2 + 9 = 11 million dollars for reserves, it still needs to hold another 9 million dollars in reserves. This leaves 11 million dollars in deposits that are not required to be held as reserves, which the bank can use for loans and other investments. The amount that the bank holds in deposits with the Federal Reserve is equal to the required reserves, which in this case is 8 million dollars (10% of 20 million dollars).

Suppose That from a New Checkable Deposit,First National Bank Holds